Third-party motor pool dents non-life insurance earnings

MUMBAI: Higher provisioning for third-party motor pool has dented earnings of non-life insurance companies in 2010-11 . All non-life insurers that have announced earnings for the last fiscal have either reported losses or decline in profit from a year earlier due to extra provisioning of about Rs 3,500 crore made in March towards thirdparty motor pool. ICICI Lombard reported a loss of Rs 80 crore, IFFCO TOKIO Rs 49 crore and HDFC ERGO Rs 36 crore for 2010-11 , compared with yearago profits.

State-run United India Insurance reported a net profit of Rs 130 crore, down 81% year-on-year while private insurer Bajaj Allianz posted a net profit of Rs 43 crore, down 64%. State-run New India Assurance, National Insurance and Oriental Insurance are yet to announce annual results. In March, the Insurance Regulatory and Development Authority (Irda) increased the provisioning requirement on third-party motor pool to 153% of the premium earned from 126%, with retrospective effect till 2006-07 .

"Motor pool has heavily impacted profits of non-life insurers . Until peer review, we would not know how this year is going to look," said S Narayan, MD and chief executive officer of IFFCO TOKIO General Insurance. Insurers will decide provisions to be made for this fiscal after peer review of third-party motor pool. Industry experts said insurers will continue to witness decline in earnings even in this fiscal. With increasing third-party pool losses, the insurance regulator may free up premium rates on third-party motor cover.

A regulatory committee has suggested a mechanism to create a "declined risk pool for third-party motor policies," which will enable insurers to price policies based on their risk perception. Higher third-party pool provisioning is also making it difficult for insurers to meet their solvency margins, which the insurance regulator relaxed to 1.3% from 1.5%. Solvency margin is a minimum excess of an insurer's assets over its liabilities set the regulator . It can be regarded as similar to capital adequacy requirements for banks. However, insurers made profit on investments and lowered underwriting losses in 2010-11 .

Some insurance companies were successful in lowering the combined ratio, excluding motor pool to less than 100%. Combined ratio is a ratio of the net of losses and expenses to the premium earned. Insurers are working on cutting underwriting losses, which is the income from core activities . When claims paid out exceeds premium income, an insurance company reports underwriting loss in operations. In 2010-11 , most companies reported a combined ratio of less than 105%, excluding third-party motor pool and 110%, including third-party pool. Insurers are expected to increase premium rates on various lines of businesses. Motor rates are likely to rise by up to 20%. "Unless third-party pool is fixed scientifically, it is going to be a vicious circle.

Companies need to rationalise pricing to bring down their losses," said AK Singhal , chairman of Gipsa, an association representing the four state-owned insurers. The industry posted a 22% growth in gross premium income during 2010-11 , compared with a year ago. "We don't expect income from investment to match up to last year's (2010-11 ) as equity market is volatile. After the peer review is over, we will know how much we have to provide for the pool. Our profits will depend on it," said Tata AIG General Insurance managing director and CEO Gaurav Garg.